A civil lawsuit filed by the Securities and Exchange Commission affirmed that the First Amendment does not preclude regulation of Internet publishers to protect against securities fraud. The case involved four complaints filed by the SEC against an individual and the corporation he created for the purpose of giving investment advice to paying subscribers. Securities and Exchange Commission v. Park, 99 F. Supp. 2d 889 (N.D. Ill. 2000).

    Yun Soo Oh Park, a.k.a. Tokyo Joe, began his burgeoning career as the publisher of an investment newsletter by posting thousands of messages related to stocks on various public Internet bulletin boards. Individuals began contacting Park directly in early 1998 to solicit further advice concerning stock picks and trading. In April 1998 Park established his first Internet Web site through which people could pay a fee to receive e-mail alerts regarding Park’s stock picks. In April 1998 Park incorporated Societe Anonyme Corp., installing himself as the sole officer and shareholder.

    In July 1998 the corporation changed its name to Tokyo Joe’s Societe Anonyme Corp., at which time Park added another Web site. Neither corporation was ever registered with the SEC. In addition to having an area accessible to the general public, the new site also had a subscriber-only area, accessible for a fee. Through his Web sites Park e-mailed, posted, and discussed stock picks, reactions to market events, and trading tips. Information was updated at irregular intervals every day. According to the SEC, Park collected over $1.1 million in Societe Anonyme membership fees.

    The SEC alleged that Park was engaged in the practice of manipulating the price of stocks he would buy and sell. Park encouraged members to buy shares of stock he already owned and then would reap the benefit -- a process known as "scalping." He also told members to hold a stock for several days, claiming it would hit a target price, while he was in the process of selling the stock. Finally, he would post false testimonials and misleading performance results. Park never revealed his true interests in the stocks he was recommending to his members.

    The SEC filed four counts against Park under the Securities and Exchange Act of 1934, the Securities Act of 1993, and the Investment Advisers Act. Park moved to dismiss the SEC’s complaint. He argued that he was not subject to the Investment Advisers Act because he did not provide "personalized" investment advice. In addition, he claimed that suits brought under this Act violated the First Amendment by attempting to regulate his editorial content. Park moved to dismiss the Securities and Exchange Act claim on the grounds that he had no duty to disclose certain information, as required by that Act. Finally, he moved to dismiss the complaint in its entirety for failing to meet the requirement of Federal Rule of Civil Procedure 9(b) that claims grounded in fraud be pled with particularity.

    The U.S. District Court for the Northern District of Illinois denied Park’s motion to dismiss. The district court first addressed Park’s claim that he could not be sued under the Investment Advisers Act. Park argued that he was not an "investment adviser" since he did not provide any personalized investment advice. This Act provides in relevant parts:

"Investment Adviser" means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation. 15 U.S.C. Sec. 80b-2(a)(11).

 

    Thus, in defining investment advisers, the statute first requires that one be in the business of rendering personalized investment advice. It then excludes those engaged in certain types of publishing on the assumption that they are not providing personalized investment advice. Park, 998 F. Supp. at 894 (citing Lowe v. Securities and Exchange Commission, 472 U.S. 181, 204 (1985)).

    The district court first found that the SEC adequately pled that Park was in the business of providing personalized investment advice, directing the bulk of its analysis to the issue of whether he was subject to the publisher exception. To fall within this exception, the defendant must publish a "bona fide" newsletter with a general and regular circulation. Park, 998 F. Supp. at 894 (citing Lowe, 472 U.S. at 206)).

    The district court held that Park’s Web sites were not bona fide newsletters. They were operated only for the purpose of persuading subscribers to buy, sell, or hold certain stocks. They were also used to send e-mails directly to individual e-mail accounts to advise subscribers. Nor were they publications of general and regular circulation. Rather, information was posted on the Web sites at irregular intervals during the day in response to specific market activity.

    The First Amendment proved no barrier to regulation under the Investment Advisers Act. Despite the fact that Park was not required to register as an investment adviser with the SEC, he was not exempt from other provisions of the relevant acts. Federal courts, including the U.S. Supreme Court, have previously upheld anti-fraud provisions in the securities and other business arenas. Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748 (1976) (untruthful speech, commercial or otherwise, has never been protected for its own sake); Commodity Trend Service, Inc. v. Commodity Futures Trading Commission, 1999 U.S. Dist. Lexis 15877 (anti-fraud provisions of the Commodity Exchange Act are applicable even to those who did not have to register under the Act). The application of the Investment Advisers Act is relevant to protecting against fraud and, therefore, does not violate the First Amendment.

    The next issue was the alleged violation of Section 10b-5 of the Securities and Exchange Act of 1934. To state a claim under that Act, a claimant must demonstrate that material misstatements or material omissions were made by a person having a duty to disclose. This duty exists when one party possesses information that the other party is entitled to know because of a fiduciary or similar relation of trust and confidence between them.

    In this case, Park had an ongoing relationship with his subscribers and communicated to them electronically on a daily basis. That the stock picks were sometimes directed at a group did not mean that the subscribers did not place their trust and confidence in Park. Park was comparable to a newspaper columnist in an earlier case deemed to have a duty to disclose to readers when "‘with knowledge of the stock’s market and an intent to gain personally, he encouraged purchases of the securities in the market.’" Park, 998 F. Supp. 2d at 899 (citing Zweig v. Hearst Corp., 594 F.2d 1261, 1268 (9th Cir. 1979)).

    Finally, the district court found that the SEC had adequately proved the existence of Park’s fraudulent statements. Federal Rule of Civil Procedure 9(b) states: "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." To fulfill the requirements of this rule a plaintiff must allege the "who, what, when, and where" of the alleged fraud. Park, 998 F. Supp. 2d at 900. This includes matters such as the time, place, and contents of the false representations, as well as the identity of the person making the representations. Id. (citing Uniquality, Inc. v. Infotronix, Inc., 974 F.2d 918, 923 (7th Cir. 1992)).

    The district court found that the SEC sufficiently met the requirements of Rule 9(b) by alleging that Park had engaged in a scheme to defraud by giving false and misleading information and advice to Societe Anonyme members when he posted that information on his Web site and e-mailed subscribers to notify them of his advice and stock picks. Specific examples were included in the SEC’s complaint, which met the standards of FRCP 9(b).

    On Sept. 26, 2000, in an unpublished opinion, the district court denied Park’s motion to stay proceedings pending appeal of this decision, meaning the case will go to trial. The full trial has not been completed.